SECURITIES AND EXCHANGE COMMISSION
Washington, DC. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2000 Commission file number 0-10697
DORCHESTER HUGOTON, LTD.
(Exact name of registrant as specified in its charter)
Texas 75-1829064
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
1919 S. Shiloh Road, Suite 600 - LB 48, Garland, Texas 75042-8234
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 864-8610
None
Former name, former address and former fiscal
year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
As of October 31, 2000, 10,744,380 Depositary Receipts for Units of Limited
Partnership Interest were outstanding.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
QUARTERLY REPORT ON FORM 10-Q
September 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Balance Sheets as of September 30, 2000 (Unaudited)
and December 31, 1999
Condensed Statements of Earnings for the Three and Nine
Months Ended September 30, 2000 and 1999 (Unaudited)
Statements of Comprehensive Income for the Three and Nine
Months Ended September 30, 2000 and 1999 (Unaudited)
Condensed Statements of Cash Flows for the Nine Months Ended
September 30, 2000 and 1999 (Unaudited)
Notes to Condensed Financial Statements (Unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
PART I
Item 1
CONDENSED BALANCE SHEETS
(Dollars in Thousands)
Sept. 30, Dec. 31,
2000 1999
-------- --------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents ....................... $ 11,817 $ 7,017
Restricted cash .................................. 404 390
Investments - available for sale ................. 5,704 5,156
Accounts receivable, net ......................... 3,152 1,555
Prepaid expenses and other current assets ........ 438 141
------- -------
Total current assets ........................... 21,515 14,259
------- -------
Property and equipment - at cost ..................... 29,495 29,203
Less depreciation, depletion and amortization .... (16,558) (15,297)
------- --------
Net property and equipment ..................... 12,937 13,906
------- --------
Total assets ......................................... $34,452 $28,165
======= =======
LIABILITIES AND PARTNERSHIP CAPITAL
Current liabilities:
Accounts payable and other current liabilities ... $ 1,119 $ 252
Production and property taxes payable or accrued . 841 630
Royalties and production payment payable ......... 1,227 889
Distributions payable to Unitholders ............. 2,390 1,956
------- -------
Total current liabilities ...................... 5,577 3,727
Long-term debt ....................................... 100 100
------- -------
Total liabilities .............................. 5,677 3,827
------- -------
Commitments and contingencies (Note 2)
Partnership capital:
General partners ................................. 179 140
Unitholders ...................................... 25,410 21,559
Accumulated other comprehensive income ........... 3,186 2,639
------- -------
Total partnership capital ...................... 28,775 24,338
------- -------
Total liabilities and partnership capital ............ $34,452 $28,165
======= =======
The accompanying condensed notes are an
integral part of these financial statements.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
CONDENSED STATEMENTS OF EARNINGS
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ----------------
2000 1999 2000 1999
-------- ------- ------- -------
Net operating revenues:
Natural gas sales ............. $ 7,368 $ 4,509 $17,497 $11,289
Other ......................... 60 51 168 143
Production payment (ORRI) ..... (391) (223) (895) (523)
------- ------- ------- -------
Total net operating revenues ....... 7,037 4,337 16,770 10,909
------- ------- ------- -------
Costs and expenses:
Operating, including prod. taxes 1,068 900 3,019 2,643
Depletion, depreciation & amort. 453 477 1,344 1,427
General and administrative ..... 196 139 513 408
Management fees ................ 155 128 421 362
Interest ....................... 10 10 29 28
Other (income) expense, net .... (84) (86) 164 (219)
------- ------- ------- -------
Total costs and expenses ........... 1,798 1,568 5,490 4,649
------- ------- ------- -------
Net earnings ....................... $ 5,239 $ 2,769 $11,280 $ 6,260
======= ======= ======= =======
Net earnings per Unit (in dollars) . $ 0.48 $ 0.26 $ 1.04 $ 0.58
======= ======= ======= =======
STATEMENTS OF COMPREHENSIVE INCOME
(Dollars In Thousands)
(Unaudited)
Net earnings ....................... $ 5,239 $ 2,769 $11,280 $ 6,260
Unrealized holding gain (loss) on
available for sale securities . 680 (72) 548 184
-------- ------- ------- -------
Comprehensive income ............... $ 5,919 $ 2,697 $11,828 $ 6,444
======== ======= ======= =======
The accompanying condensed notes are an
integral part of these financial statements.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
CONDENSED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
--------------------
2000 1999
------- -------
Cash flows provided by operating activities .......... $12,094 $ 7,287
------- -------
Cash flows used in investing activities:
Purchases of prop. & equipment ................... (402) (296)
Cash received on sale of other property and equip. 54 12
------- -------
Cash flows used in investing activities .............. (348) (284)
------- -------
Cash flows used in financing activities:
Distributions paid to Unitholders ................ (6,946) (5,862)
------- -------
Cash flows used in financing activities .............. (6,946) (5,862)
------- -------
Increase in cash and cash equivalents ................ 4,800 1,141
Cash and cash equivalents at January 1, .............. 7,017 4,167
------- -------
Cash and cash equivalents at September 30, ........... $11,817 $ 5,308
======= =======
The accompanying condensed notes are an
integral part of these financial statements.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. The condensed financial statements reflect all adjustments (consisting only
of normal and recurring adjustments) that are, in the opinion of
management, necessary for a fair presentation of Dorchester Hugoton, Ltd.'s
(the "Partnership's") financial position and operating results for the
interim period. Interim period results are not necessarily indicative of
the results for the calendar year. Please refer to Management's Discussion
and Analysis of Financial Condition and Results of Operations for
additional information. Per-Unit information is calculated by dividing the
99% interest owned by Unitholders by the 10,744,380 Units outstanding.
2. Through 1998 the Partnership recorded $450,000 (which included related
interest) towards a request from Panhandle Eastern Pipe Line Company
("PEPL") for refund of Kansas tax reimbursements received by the
Partnership during the years 1983 to 1987. These charges resulted from a
ruling by the United States Court of Appeals for the District of Columbia,
which overruled a previous order by the Federal Energy Regulatory
Commission. On March 9, 1998 $151,757 was paid to PEPL. An additional
$366,633, which is still awaiting possible regulatory/judicial/legislative/
settlement action, was placed into an escrow account. On March 2, 1999,
$2,840 was released from escrow to PEPL. At September 30, 2000, the value
of the escrow is approximately $404,000. The escrowed funds include amounts
that could possibly be waived, recovered or recoverable from others, of
which $34,000 has been recorded as an allowance for bad debt on the
Partnership's books in the event it is not waived and deemed uncollectible.
The Partnership received a notice and demand from the Internal Revenue
Service ("IRS") assessing a penalty payment of $100 per Partnership K-1, or
$446,100, excluding interest. The IRS penalty resulted from a clerical
error in requesting an automatic extension of time to file the
Partnership's federal income tax return. Although at this time no such
notices have been received from the various state taxing authorities with
which the Partnership is required to file income tax returns, it is
possible that some of those states may later assess a similar penalty due
to the Partnership's failure to secure an extension to file the federal
income tax return. An estimated expense of $500,000 was recorded on the
Partnership's books during June 2000. All federal and state tax returns
have been filed and all Unitholders timely received their K-1 from the
Partnership. The Partnership is contesting its liability for the IRS
penalty and will consider contesting any state penalties assessed.
The Partnership is involved in a few other legal and/or administrative
proceedings arising in the ordinary course of its gas business, none of
which have predictable outcomes and none of which are believed to have any
significant effect on financial position or operating results.
3. Since 1994 the Partnership has maintained an unsecured revolving credit
facility for $15,000,000 with Bank One, Texas, N.A. The current borrowing
base is $6,000,000, which will be re-evaluated by Bank One at least
semi-annually. If, on any such date, the aggregate amount of outstanding
loans and letters of credit exceed the current borrowing base, the
Partnership is required to repay the excess. This credit facility covers
both cash advances and any letters of credit that the Partnership may need,
with interest being charged at the base rate for Bank One (9 1/2%) on
September 30 and October 31, 2000. All amounts borrowed under this
facility will become due and payable on July 31, 2001. As of September 30
and October 31, 2000, letters of credit totaling $25,000 were issued under
the credit facility and the amount borrowed was $100,000 (the minimum
borrowing level necessary to maintain the credit facility).
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net cash flows from operating activities during the three and nine months ended
September 30, 2000 were $5,987,000 and $12,094,000 compared to $2,988,000 and
$7,287,000 for the same periods of 1999. Third quarter net earnings were $0.48
per Unit compared to $0.26 per Unit in 1999. Operating cash flows and net
earnings were higher during 2000 primarily as a result of significantly higher
natural gas market prices compared to the same period last year as shown in the
table below.
The Partnership has available a $15,000,000 unsecured revolving credit facility
with a current borrowing base of $6,000,000. Please see Note 3 to the Financial
Statements for additional information. Cash and temporary cash investments
totaled $11,817,000 on September 30, 2000 compared to $7,017,000 on December 31,
1999. Prepaid expenses and other current assets increased because of insurance
premium payments made in the September 2000 quarter. On March 15, 2000 a special
distribution of $0.10 per Unit was paid to Unitholders of record on February 29,
2000. On April 14, 2000 and July 14, 2000 the Partnership paid distributions of
$0.18 per Unit for the first two calendar quarters of 2000. On October 13, 2000
the Partnership paid an increased quarterly distribution of $0.22 per Unit for
the third calendar quarter of 2000. The total of the four distributions was
approximately $7,380,000.
In connection with the Oklahoma properties, in May 2000 the Partnership paid
approximately $730,000 in production payments for the year ended February 29,
2000; an additional $701,000 has been accrued through September, 2000. As
previously discussed, an accrual of approximately $500,000 was recorded to Other
(income) expense, net during June 2000 as a possible penalty payment for a
clerical error regarding tax return extensions; please see Note 2 to the
Financial Statements.
The Partnership's portion of gas sales volumes (not reduced for Oklahoma
production payments) and weighted average sales prices were:
Three Months Ended Nine Months Ended
---------------------------- -----------------
September 30, September 30,
---------------- June 30, -----------------
2000 1999 2000 2000 1999
Sales Volumes - MMCF: ----- ----- ----- ----- -----
Oklahoma ............... 1,427 1,397 1,374 4,193 4,146
Kansas ................. 269 327 282 842 1,011
----- ----- ----- ----- -----
Total MMCF ................ 1,696 1,724 1,656 5,035 5,157
===== ===== ===== ===== =====
Weighted Average Sales Prices - $/MCF:
Oklahoma ............... $4.33 $2.60 $3.50 $3.46 $2.17
Kansas ................. 4.41 2.68 3.58 3.55 2.25
Overall Weighted Avg - $/MCF $4.34 $2.62 $3.51 $3.48 $2.19
Oklahoma gas sales volumes were essentially unchanged during the current quarter
compared to the same quarter of 1999 and higher than the previous quarter of
2000 during which more production was reduced by state tests. Kansas natural gas
sales volumes were lower during the current quarter compared to the previous
quarter and the same quarter of 1999 as a result of natural reservoir decline
typical of all producers in that area.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
Through September 30, 2000, the Partnership has fracture treated (creating
cracks in the formation to assist gas flow from the producing zones into the
well bore) ten wells this year in Oklahoma. Of the ten wells the highest
increase in volume was from 100 MCF per day to 309 MCF per day recently. One
well decreased volume from 98 MCF per day to 70 MCF per day although shut-in
pressure increased from 28.6 psig to 47 psig. The highest shut-in pressure
increase was from 39 psig to 118.3 psig and the least shut-in pressure increase
was from 31.3 psig to 37.5 psig. Increased pressure and volume usually results
in increased reserves. The Partnership plans to continue fracture treatments.
Two fracture treatments completed in late October, 2000 are still being
evaluated. The Partnership's Fort Riley well production continues to vary around
50-60 MCF per day with about 6 bbls of water per week.
As discussed in the 1999 Annual Report on Form 10-K, the Partnership is active
in supporting its views regarding possible Oklahoma regulatory/legislative
action on infill drilling and in monitoring activities resulting from removal of
production quantity restrictions during 1998 in the Guymon-Hugoton field. Both
infill drilling and removal of production limits could require considerable
capital expenditures. The outcome and the cost of such activities is
unpredictable. No additional compression has been installed by operators on
adjoining acreage resulting from the relaxed production rules that affects the
Partnership's wells. Such installations by others could require Partnership
expenditures to stay competitive with adjoining operators.
During October and November 2000, Kansas preliminarily adopted new regulatory
rules, agreed upon by most producers, to enable the use of field compressors to
operate Hugoton Field wells at a vacuum and provide that no well will be
restricted to less than 100 MCF per day. The Partnership is presently retesting
nine wells to comply with these new regulations. The Partnership does not
anticipate any significant change in current production; possible effects on
future production allowed by the state are not predictable.
The Partnership is continuing to monitor the activity on nearby acreage in the
Council Grove formation. At present 15 wells have been drilled by others. Two of
the fifteen 15 wells were recompleted in the Guymon Hugoton Field which improved
production by 50 to 70 MCF per day over the two original Guymon Hugoton wells
that were plugged and abandoned per state regulations. The Partnership's
ownership includes the Council Grove formation underlying most of its Oklahoma
acreage. It is not known if such monitoring will result in any plans by the
Partnership to attempt a Council Grove well; previous preliminary reviews
yielded unfavorable forecasts. Recent results by others in the 13 remaining
wells have varied from 21 MCF per day to 382 MCF per day. Production volumes in
subsequent months have varied with most wells showing decreases. Current total
production from the three Council Grove wells owned by others but located on the
Partnership's acreage is approximately 41 MCFD, 16 MCFD and 10 MCFD. The
Partnership has a minor overriding royalty interest in the three wells.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
PART I
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Continued)
As previously reported, the accounting firm that has, for years, processed the
Partnership's 4,000 to 5,000 individualized K-1's notified us that their current
computer software would not be able to process Year 2000 tax returns in early
2001. Subsequently, the Partnership was notified during the third quarter of
1999 that the accounting firm had begun developing new software and acquired
another firm that had a Year 2000 compliant product. However, conversion of the
data to the new software will still be necessary. Additionally, normal costs
associated with K-1 processing, including the new cost of electronic filing of
tax year 2000 K-1's, have increased significantly as reflected in increases in
General and administrative costs. Consequently, the Partnership believes it
could incur estimated total expenditure increases over prior years of $250,000
to $300,000 during calendar year 2000 and 2001 on K-1 preparation and/or
conversion costs.
As previously discussed in the 1997, 1998, and 1999 Annual Reports, the
Partnership is reviewing its strategic alternatives in light of the various
mergers and other business transactions occurring in the natural gas and energy
industry. Although no decision to sell or combine the Partnership's business
with others has been made, the Partnership anticipates possible discussions with
third parties, which could result in such a decision. The Partnership has no
timetable for any such discussions, and there is no assurance that any such
discussions will lead to a transaction. During the first quarter of 1998 the
Partnership adopted a severance policy which would provide up to approximately
$2.8 million of severance payments.
<PAGE>
DORCHESTER HUGOTON, LTD.
(A Texas Limited Partnership)
OTHER INFORMATION
PART II
Item 1. Legal Proceedings: See Notes to Condensed Financial Statements.
Item 5. Other Information: None.
Item 6. Exhibits and Reports on Form 8-K:
a) Exhibit 27 - Financial Data Schedule
b) Reports on Form 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DORCHESTER HUGOTON, LTD.
Registrant
Date: November 3, 2000 /s/ Kathleen A. Rawlings
Kathleen A. Rawlings
Controller (Principal Accounting Officer)
